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Delaware Small Cap Core Fund Quarterly commentary March 31, 2015

Within the Fund

Delaware Small Cap Core Fund (Institutional Class shares and Class A shares at net asset value) posted positive returns but failed to keep pace with its benchmark, the Russell 2000® Index, during the first quarter of 2015. The main detractor from performance was stock selection in the business services, technology, and communications services sectors. On the positive side, stock selection in the basic materials, energy, and consumer discretionary sectors contributed to relative performance.

One of the stocks that detracted from performance during the quarter was RigNet, a provider of fully-managed voice and data networks for the oil and gas industry. During the quarter, shares of RigNet fell 30%, which was mainly a result of the company’s exposure to the energy sector. We continue to own this stock as we believe the company’s unique business model should allow it to respond well to any stabilization and recovery in the energy markets.

Acorda Therapeutics is a biotechnology company that specializes in therapies for neurological diseases, particularly multiple sclerosis (MS). The stock fell approximately 20% during the quarter amid news that a hedge fund filed an inter partes review (IPR) to challenge Acorda’s patent for its MS drug, Ampyra, putting pressure on the stock. An IPR process begins with a third party filing a petition with the U.S. Patent and Trademark Office and does not invalidate the company’s patents in any way. We continue to own the stock as we believe that, although the challenge adds volatility to the stock in the short term, it should ultimately fail. We are positive on the company’s new drug pipeline, which includes a number of therapies in various phases of clinical trials. is a leading digital promotions platform that connects retailers and consumers across a variety of digital channels. Shares declined nearly 35% during the quarter as the company reported slower-than-expected revenue and transaction growth for the fourth quarter of 2014. We maintained the Fund’s position in the stock — we believe that’s scale and advanced technology platform should enable the company to capture significant market share, leading to improved top-line growth and margin expansion.

Among the stocks that contributed to the Fund’s performance during the quarter was ICON PLC, a contract research organization that provides outsourced development services to the pharmaceutical, biotechnology, and medical device industries. The stock rose nearly 40% during the quarter on the back of a strong earnings beat. In addition, the company issued 2015 guidance that was substantially above consensus estimates. We continue to see further upside in the stock which we anticipate will be driven by business execution and continued margin expansion.

Biotechnology company Ligand Pharmaceuticals develops programs that lead to licensing deals or acquire royalty revenue-generating assets with biotechnology and pharmaceutical companies. The stock rose 45% during the quarter on positive news from partner Amgen that reported successful trial data in early March for its drug Kyprolis (which can be used in the treatment of multiple myeloma). Ligand receives a royalty from Amgen for the company’s sales of Kyprolis. We continue to favor shares of Ligand based on its diversified business model, multiple drug development partnerships, and what we see as an attractive pipeline of potential new drugs.

After an increase of nearly 40% during the fourth quarter of 2014, shares of NPS Pharmaceuticals, a biopharmaceutical company, rose almost 30% during the first quarter as the company agreed to be acquired by Shire. The all-cash tender offer was announced in early January and we closed out the Fund’s position in NPS Pharmaceuticals in late February. The addition of NPS’s products should strengthen Shire’s rare diseases portfolio.


In our view, small-cap stocks remain a good way to leverage the strength of the U.S. economy as small-cap companies generally derive a higher percentage of sales from the United States than mid- or large-cap companies. We ended the quarter with the forward price-to-earnings ratio back at cycle highs. However, looking at small-caps relative to large-caps suggests that small-caps are currently cheaper.

We continue to keep a close eye on economic indicators as we believe improving conditions in the U.S. should provide tailwinds to the earnings growth of small-caps. We believe the U.S. Federal Reserve will begin to raise rates once the economy is strong enough to stand on its own. This should come after the Fed is comfortable with inflation and employment, which we are in agreement with.

We have maintained the Fund’s overweight to the basic materials and capital goods sectors, which we believe should perform well at this point in the cycle. The Fund is overweight in the finance sector, specifically regional banks, which could benefit from net interest margin relief when rates increase. Small-cap banks are already experiencing positive loan growth trends relative to their large-cap peers. The Fund is underweight the yield sensitive sectors like real estate investment trusts (REITs) and utilities, which do not look attractive to us in this environment.

2015 is off to a solid start with respect to merger-and-acquisition activity, particularly in the healthcare sector where we have already had one takeout in the portfolio. We expect this activity to continue across multiple sectors in the portfolio as the credit markets remain favorable. Our research continues to favor companies with what we view as strong balance sheets and cash flow, sustainable competitive advantages, and high-quality management teams, which we believe have the potential to outperform over the cycle.

The price-to-earnings ratio is a valuation ratio of a company’s current share price compared to its earnings per share.


The views expressed represent the Manager's assessment of the Fund and market environment as of the date indicated, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Information is as of the date indicated and subject to change.

Document must be used in its entirety.


The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.

Performance data current to the most recent month end may be obtained by calling 800 523-1918 or visiting

Total returns may reflect waivers and/or expense reimbursements by the manager and/or distributor for some or all of the periods shown. Performance would have been lower without such waivers and reimbursements.

Average annual total return as of quarter-end (06/30/2015)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)0.05%3.10%6.88%19.21%19.16%8.58%11.03%12/29/1998
Class A (at offer)-5.72%-2.83%0.74%16.89%17.76%7.94%10.63%
Institutional Class shares0.14%3.26%7.20%19.52%19.46%8.85%11.20%12/29/1998

Returns for less than one year are not annualized.

Class A shares have a maximum up-front sales charge of 5.75% and are subject to an annual distribution fee.

Prior to Aug. 1, 2005, the Fund had not engaged in a broad distribution effort of its shares and had been subject to limited redemption requests. 12b-1 fees were waived for this period. Had 12b-1 fees been applied, performance would have been lower. Expense waivers were in effect for the periods shown. Performance would have been lower if waivers did not apply.

Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.

Russell 2000® Index (view definition)

Expense ratio
Class A (Gross)1.32%
Class A (Net)1.32%
Institutional Class shares (Gross)1.07%
Institutional Class shares (Net)1.07%
Top 10 holdings as of 06/30/2015
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Casey's General Stores Inc.1.3%
West Pharmaceutical Services Inc.1.2%
Ligand Pharmaceuticals Inc.1.1%
G-III Apparel Group Ltd.1.1%
Cheesecake Factory Inc.1.1%
Popeyes Louisiana Kitchen Inc.1.1%
Tenneco Inc.1.0%
CONMED Corp.1.0%
Prosperity Bancshares Inc.1.0%
Total % Portfolio in Top 10 holdings11.1%

Institutional Class shares are only available to certain investors. See the prospectus for more information. 

All third-party marks cited are the property of their respective owners.

All third-party marks cited are the property of their respective owners.

Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.

Carefully consider the Fund’s investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Fund’s prospectus and its summary prospectus, which may be obtained by clicking the prospectus link located in the right-hand sidebar or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.

Investing involves risk, including the possible loss of principal.

Narrowly focused investments may exhibit higher volatility than investments in multiple industry sectors.

Investments in small and/or medium-sized companies typically exhibit greater risk and higher volatility than larger, more established companies.

REIT investments are subject to many of the risks associated with direct real estate ownership, including changes in economic conditions, credit risk, and interest rate fluctuations.

International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.

Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.

Not FDIC Insured | No Bank Guarantee | May Lose Value